Buy Vehicles Tax Free with Montana LLC

I want to say from the outset that I have not investigated this story independently. I do not claim that this practice will work in any state. But there was an article recently in a Framingham, MA newspaper about people using a Montana LLC to purchase RV's sans the sales tax. The practice is to set up an LLC in Montana, and that company will buy the vehicle. Montana will allow you to register your vehicle in their state. But, according to this article, Montana will not share any information about the owner of the LLC that would allow a given state to track them down.

The problem is this: this methodology relies on Montana's secrecy and on MA not being able to find you. The newspaper contacted Ann Dufresne, the director of communications for the Massachusetts Registry of Motor Vehicles for a comment on this. Ann warned drivers would face stiff penalties for trying to avoid the state's sales and excise taxes and other fees.

A person who drives a car in Massachusetts for more than 30 days is required to register and insure it here and pay the sales tax, she said. Residents who don't register their vehicles here could face more than $6,000 in fines and potentially have their license suspended, according to state law.

Big News! You Can Be an Origin-based State and Still Be in the SSTP

Sounds like the SSTP is in danger to me.

Is this the beginning of the end of the SSTP?

The Streamlined Sales Tax (SST) Governing Board has amended the SST Agreement to allow states to become full members even while continuing to source sales on an origin basis. As reported in CCH, the Board and its predecessor organizations rejected repeated attempts in the past to change the Agreement to allow origin sourcing, most recently at its meeting in Kansas City, Kansas. However, the Board relented when confronted with the impending loss of at least two associate member states, uncertain prospects for adding further states, pressure from local governments, and a divided business community.

The chief cornerstone of the SSTP, regardless of how it's spun now, was uniformity amongst the several states. O one of the main impediments to uniformity/simplicity was always the question of origin vs. destination sourcing. Some states do it one way, some another. "Why can't we all just pick one way?" was the theme early on. Well, now faced with losing these associate states and never being able to coax certain origin states to come over to the destination-based approach, the Board blinked.

So what else will they cave on to get more states to participate? You get the feeling that we're in the same boat we were always in just rowing in circles.

Did You Collect (or Pay) That Michigan Sales Tax On Services for 10 Days?

If you collected it or paid it, then you may be in the refund business.

 

Effective December 1, 2007, a 6% Michigan use tax was enacted on certain taxable services. That new tax was vastly unpopular and was repealed but not until December 10, 2007. What to do for the interim? Here's the answer (from CCH): A person that provided any service subject to the tax and collected the tax beginning December 1, 2007, before the legislation that repealed the service tax was signed into law, must return the amount of the tax to the person that received the service or remit the tax to the Department of Treasury, and the person that received the service may apply for a refund of the tax. A person that fails to remit any tax collected from a person that received a service is subject to penalties unless the collected tax was returned to the person that received the service.

The ERA Begs Congress Not to Pass SSTP Legislation

Information Week had the story on a different retailers association that had the opposite opinion from the National Retail Federation. The Electronic Retailers Association issued a statement on Thursday squaring off over legislation that would require Internet merchants, mail-order houses, and other "remote sellers" to collect sales tax across state lines."

 

The debate is based around U.S. Representative William Delahunt's, D-Mass., bill (H.R.3396) that would allow states that have implemented the Streamlined Sales and Use Tax Agreement (SSUTA) to require out-of-state sellers to collect sales tax on merchandise sold their residents.  

The ERA opposes the bill, saying it would stifle e-commerce and burden electronic retailers with costs and compliance problems.

"In a very short amount of time, the Internet has become an unprecedented marketplace where the playing field is level for retailers both large and small," Barbara Tulipane, ERA President and CEO, said. "The Streamlined Sales Tax Project and its provisions would create a cost-prohibitive barrier for smaller retailers who are the lifeblood of our economy."

ERA said it will actually discriminate against online sellers.

"Making electronic retailers responsible for computing, collecting, and remitting tax for thousands of taxing jurisdictions with different rates and coverage is unfair and will significantly harm the growth of e-commerce," the group said in a statement released this week. The group pointed out that the agreement allows states with multiple tax rates to adopt new an additional rate, which the ERA said could force electronic retailers to administer 15,000 tax rates. The ERA also said that direct marketers would have to pay for taxes customers fail to pay, while traditional retailers are not held responsible. Finally, it said that online retailers don't enjoy tax incentives available to in-state businesses. Those requirements would put online sellers at a competitive disadvantage, ERA said.

The ERA said more time is necessary to develop consensus among the affected parties for a "rational, practical and simple system for assessing and collecting taxes" from Internet sales.

Another State with a Surplus

Here's the headline and story from the Missouri newspaper the Columbia Tribune:

State tax income higher than expected

Published Thursday, December 6, 2007

JEFFERSON CITY (AP) - Missouri's tax revenue is coming in ahead of what was budgeted.

The state Office of Administration says November's net general revenue was up more than 6 percent compared to November 2006. Missouri's annual budget takes effect in July. Through the first five months of its fiscal year, net general revenue was up about 4.5 percent compared to last year. The state budget was built on an assumption that revenue would grow by 3.8 percent this year.

The larger-than-projected increase is largely because of income taxes. Individual income tax revenue was up more than 7.5 percent during the first five months of the budget year. Sales tax collections were up barely 1 percent over last year.

National Retail Federation Begs for SSTP Passage

It's hard to blame them really. If the big retailers are charging tax, but their competitors are not, that is a competitive disadvantage. Here's the compelling argument from  J.C. Penney's Vice President and Associate General Counsel-Tax Wayne Zakrzewski.  "We are here to ask you to level the playing field between sellers that collect sales tax and those who cannot be required to collect the tax because they do business in the community on a virtual rather than physical basis." 
"Many of our competitors do not collect, which gives them a competitive advantage. This is not because they are innovative or provide incremental value to the consumer, but because the states do not have the ability to require collection of a tax that is due from the consumer."  "We believe there are compelling reasons why Congress should act now to level the playing field," Zakrzewski, whose multi-state company collects sales tax on in-store, catalog and Internet purchases alike, said. "Passage of H.R. 3396 into law would be the appropriate next step to a modern, fair and responsive sales tax system across all participating states and sellers."  Never heard of the NRF?

The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com

Expanding Manufacturing Facility? Beware the Contractor Trap

We frequently get involved in transactions where a client is expanding the manufacturing plant. Many times they hire a contractor to do the work. The contractor ends up buying all the materials (including certain equipment that would likely be considered manufacturing equipment) and installing it or incorporating into the structure they're building. This is NOT good. 

Why is this a problem? In most states a contractor (especially one working under a lump-sum agreement) is considered to be a service provider not a seller of TPP. As such, the materials the contractor purchases are deemed to be "used" by the contractor in the course of the construction service. A contractor in most states is not a manufacturer and not conducting a manufacturing activity. Therefore, they consumed some equipment that would be exempt if purchased by the manufacturer but not if purchased by a contractor.

This is an area where it is crucial to be careful. And don't think this doesn't come up very often. Here's a recent case in point:  Decision No. 19969, Idaho State Tax Commission, July 30, 2007 in which it was held that since the equipment was purchased by a contractor, the production exemption was not available.

If You Use an "Agent" in Another State, You Might Have Nexus

Here's another example of a situation where non-related people acting as your "agent" can give you nexus with another state.

This was an administrative decision recently issued in Alabama. It involves an out-of-state company that rented graduation caps and gowns to students in Alabama.
 
This rental company used non-related individuals working on commission to measure the students for the caps and gowns. These "agents" also provided the students (or the schools) with the taxpayer's order forms. They collected the completed order forms and submitted them to the rental company. Although there was no written agency agreement between the rental company and the people doing the measurements, the facts established that the in-state representatives were de facto or implied agents of the taxpayer. The judge ruled that the in-state representatives were clearly acting on behalf of the taxpayer when performing those duties.  The in-state representatives were also compensated for their activities or services on behalf of the taxpayer in the form of a commission. Ultimately, the in-state representatives were acting as agents of the taxpayer, and their actions on behalf of the taxpayer in Alabama allowed the taxpayer to establish and maintain its business of renting caps and gowns in Alabama. Thus, the taxpayer had nexus with Alabama.

But wait there's more: Even if the in-state company's representatives were not deemed to be de facto or implied agents of the taxpayer, the taxpayer still had nexus with Alabama because it owned caps and gowns that were being rented in Alabama, and it derived substantial income from the presence of the caps and gowns in Alabama. The physical presence of the taxpayer's income-producing property in Alabama established substantial nexus. Thus, the taxpayer was doing business in and was subject to Alabama's taxing jurisdiction.

Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007. Let us know if you'd like a copy of this case and we'll get it to you.

Durable Medical Equipment and Prosthetic Devices Exempt in GA

We were alerted by CCH that a Georgia regulation (Reg. 560-12-2-.30) addressing the sales and use tax treatment of sales of drugs and medical equipment has been amended to provide additional guidance regarding prosthetic devices, durable medical equipment, and insulin. 

 

Durable Medical Equipment

"Durable medical equipment" is intended to withstand repeated use, is primarily and customarily used for a medical purpose, is generally not useful absent illness or injury, and is appropriate to use in the home. The regulation gives examples of durable medical equipment. The sale or use of durable medical equipment is exempt from sales and use tax if paid for directly with funds of the United States or the State of Georgia pursuant to Medicare or Medicaid programs.

Prosthetic Devices

A "prosthetic device" is defined as a prescription replacement, corrective, or supportive device meant to artificially replace a missing portion of the body, correct or prevent a physical deformity or malfunction, or support a weak or deformed portion of the body. The sale or use of prosthetic devices is exempt from sales and use tax. The regulation gives examples of these devices.

Certain People Can Purchase Goods in Washington Tax Free

Did You Know?

 

Residents of certain states, U.S. Territories, and Canadian provinces that have a state or provincial sales tax rate of less than 3% are eligible to purchase goods in Washington without paying sales tax if they will take and use the goods outside the state.  BUT, sellers are not required to make these exempt sales, and no refund is available if the seller chooses to collect sales tax. According to CCH, this exemption is commonly used by residents of Oregon, Montana, and the province of Alberta, Canada.

Big Changes In Arkansas Sales Tax

Effective January 1, 2008, big changes have happened in Arkansas. The changes include how local city and county sales taxes are to be administered in the following circumstances:

• Delivery of Merchandise to Customers --Beginning January 1, 2008, if your business makes a retail sale of property and delivers the tangible property through common carrier, your truck, mail, or by any other shipping or delivery method to your customer, you will charge the state, county, and city taxes based on where the purchaser takes receipt or delivery.


• Taxable Services Performed in Arkansas -- Beginning January 1, 2008, state and local sales and use tax for taxable services will be collected based on where the customer receives the service. If the service is not received by the purchaser at the seller’s business location, the local taxes due are based on where the purchaser takes receipt of the service provided. In most cases, the customer will take receipt of the taxable services where it is performed; however, this may not apply in all circumstances.


• Rental or Lease of Tangible Personal Property --A lease or rental that requires periodic payments is subject to sales tax as follows:

1. The first periodic payment is subject to state and local taxes based on where the lessee receives the property.

2. For periodic payments made after the first payment, the state, city, and county taxes are based on the "primary property location" of the tangible personal property for each period covered by the payment.

The primary property location is the address for the property provided by the lessee to the lessor in the ordinary course of business. The primary property location is not changed by intermittent use at different locations. If the property is moved to a new location and the lessor has been notified of the new location, the lessor will tax subsequent payments based on
the new location. If the lessor does not receive notice of a change in location, sales tax will continue to apply based on the address the lessee gave the lessor for the primary property location.


• Rental or Lease of Motor Vehicles, Trailers, Semi-Trailers or Aircraft -- If your business leases or rents motor vehicles, trailers, semi-trailers, or aircraft that requires recurring periodic payments, you will collect the state, county, and city taxes due based on the primary property location. The primary property location is the address provided by the lessee in the ordinary course of business. The primary property location does not change by intermittent use at different locations. For a lease or rental that does not require recurring periodic payments, the local taxes are based on where the leased equipment is received by the purchaser.

• Taxable Services Purchased from Out of State Vendors for Use in the State of Arkansas -- If you purchase services from outside the State that are subject to tax in Arkansas and first use the service within the State of Arkansas, then Arkansas state and local use tax is due based on where you take receipt of the services. Credit will be given for taxes legally imposed and paid in the state where the taxable service was performed.

• Elimination of City and County Local Tax Caps -- Beginning January 1, 2008, local tax caps on single transactions will no longer apply when retailers collect city and county sales and use taxes. Since the caps no longer apply, retailers will collect the full amount of state, city, and county taxes on all transactions. Your customer may be eligible to apply to DFA for a refund of the local tax for qualified business purchases made on or after January 1, 2008.

The local tax cap will continue to apply to the first $2500 per item on the sale of motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes. Sellers should continue to apply the cap on the sales of those items only.

• Rebates or Refunds of Local Tax Paid to the Seller – Business Purchasers Only
Qualifying businesses may be eligible for a rebate or refund of the additional local tax paid on qualifying business purchases on purchase invoices that exceed $2500.00. A qualifying business purchase means a purchase of tangible personal property or a taxable service for which a business may claim a business expense deduction or depreciation deduction for federal income tax purposes. The purchase will be eligible even though the business purchaser may not be
required to file an income tax return. In addition, governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches) may apply for rebates/refunds of additional local taxes paid.

For purposes of calculating the rebate or refund amount, a uniform single transaction definition has been adopted effective January 1, 2008: "Single transaction shall mean any sale of tangible personal property or taxable service reflected on a single invoice, receipt, or statement for which an aggregate sales or use tax amount has been reported or remitted to the state for a single local taxing jurisdiction." Note: Refunds or rebates will no longer be issued by the city or county for purchases made on or after January 1, 2008. There is a six month time limit on requesting a rebate which begins on the date of the purchase or from the date of payment of the tax to the seller, whichever is later.

• Bad Debt Write Offs --Beginning January 1, 2008, bad debts may be deducted on the Excise Tax report for the tax period during which the bad debt is written-off as uncollectible on your books and eligible to be deducted for federal income tax purposes. The bad debt deduction is eligible for sales on which the tax has previously been reported and paid to DFA. The bad debt must have resulted from a sale that has occurred within the last three years. The deduction is available for taxpayers even though the business may not be required to file an income tax return. Some examples are governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches). Bad debts include, but are not limited to, worthless checks, worthless credit card payments, and uncollectible credit accounts. Bad debts do not include financing charges or interest, uncollectible amounts on property that remain in the possession of the taxpayer or vendor until the full purchase price is paid, expenses incurred in attempting to collect any debt, debts sold or assigned to third parties for collection, or repossessed property.

Michigan Services Tax Was in Effect For a Few Hours -- What Do You Do If You Collected It?

The MI Services tax was in effect for a few hours on 12/1/2007. The repealing law allows the businesses that collected the tax to either refund to the customer or pay to the state. For taxpayers that did not collect the tax the legislators have agreed to pass legislation to hold them harmless.

Tax "Paperwork Snafu" Results in Bad Pubilicity

Just about the last thing a tax department wants is something they are responsible for to result in bad publicity for their publicly-held company. Here's an example of something that my guess is not the tax department's mistake, but was a major crisis to deal with for a well-known company.

Tax Department Pays $38,569 for a 12 Pack of Toilet Paper

You've seen the headline that goes something like this: "Federal Government Pays $735 for a Hammer". Well, here's a case where a retailer probably had to spend many thousands dealing with a customer who filed what she called a "message lawsuit". The question you have to ask yourself is "what's the message?"


You try to get the tax rates right on the right items taking into account crazy tax laws all over the nation, and you get it wrong a 12-pack of toilet paper and you get sued over that? Give me a break. We must have bigger problems to fight than this.

Check out this article in the Pittsburgh Tribune-Review.

And I quote: "A Murrayville homemaker has won another legal battle against a retail giant.
Mary Bach, 63, sued Kmart after its store on Mall Boulevard in Monroeville charged her 7 percent sales tax on two 12-pack rolls of Angel Soft toilet paper -- a non-taxable item, according to the state Department of Revenue. On Thursday, Monroeville District Judge Herbst ruled in Bach's favor, finding Kmart twice levied the tax improperly. She gets $100, plus court costs.
Company spokeswoman Kim Freely said the tax was charged in error that the problem has been fixed. The Tribune-Review bought the same toilet paper yesterday tax-free.

"Bach, a self-proclaimed consumer advocate, has successfully sued other retailers including Wal-Mart and Radio Shack for incorrectly taxing items. Bach calls them "message lawsuits."

"I want to be in a position to educate consumers," Bach said. "The only thing retailers understand is a message lawsuit."

What's the message?

Do People Shop Online to Avoid the Tax -- Looks Like the Answer is No

According to this article in Forbes magazine, 17 out of the top 20 Internet retailers are brick and mortar operations that collect tax. Also, it is estimated that consumers paid sales tax on half of their online purchases this Christmas.


So maybe avoiding sales taxes isn't the main lure of shopping online. Even though you wouldn't be surprised people would try to avoid the tax which now averages more than 8.5% in the taxing states.


This estimate that half the sales taxes owed by consumers on the purchases of goods online are being collected anyway was made by William Fox, director of the Center for Business and Economic Research at the University of Tennessee. He bases that estimate on surveys of Web sites he and his students have conducted over the last two years.

"I was surprised to find it was so high. And if anything, it's growing," says Fox.


Only three of the 20 largest online merchants in 2006 were pure online operations, according to Internet Retailer's annual rankings. Staples (nasdaq: SPLS - news - people ), Office Depot (nyse: ODP - news - people ), Sears Holdings (nasdaq: SHLD - news - people ), Best Buy (nyse: BBY - news - people ), J.C. Penney (nyse: JCP - news - people ), Wal-Mart Stores (nyse: WMT - news - people ), Circuit City (nyse: CC - news - people ) and Target (nyse: TGT - news - people ) all made the top 20. All collect sales tax. Limited Brand's (nyse: LTD - news - people ) Victoria's Secret, which collects taxes, sold more online last year than did Overstock.com (nasdaq: OSTK - news - people ), which only applies tax to shipments bound for Utah.

As the article in Forbes states, even non-traditional retailers have started moving into the tax line, too. Dell (nasdaq: DELL - news - people ) began collecting sales tax nationwide last year, prompting some grumbling online by surprised shoppers. CDW (nasdaq: CDWC - news - people ) began collecting in 2005.

Retailers are finding that customers like being able to return a defective DVD player purchased online to a local store.

We've blogged before about it being pretty well-settled that if you are a retailer that allows people to return items to a brick and mortar location, you have nexus -- even if the online retailer and the brick/mortar one are in separate legal entities.